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Withholding Methods  Employer calculates income tax withholding from employees’ paychecks based on their Form W-4 ◦ Pay includes salaries, bonuses, commissions ◦ W-4 completed by employee and tells employer  Number of allowances claimed by employee  Marital status - single, married, or married but withhold tax at higher single rate  Exempt status – employee can only claim exempt if he/she had no income tax liability last year and expects none this year Note: If no W-4 filed, employer must withhold at “single with no exemptions” 2012 Cengage Learning

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Special Withholding Allowances  Employee does not need to prove to employer that number of allowances is valid  Single employee with one job may claim one special allowance  Married employee may claim one special allowance in certain situations  Married employee with more than one job or working spouse must complete W-4 Page 2 “Two Earners/Multiple Jobs Worksheet” to calculate number of allowances 2012 Cengage Learning

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Withholding on Pensions  Payors must withhold on IRA distributions, stock bonus plans, profit-sharing and pension distributions  Withholding depends upon whether pension/deferred payment is a periodic or nonperiodic payment o Rates are based on treating periodic payment as if it were wages o Withholding is flat 10% or 20%, depending upon what type of plan it is 2012 Cengage Learning

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Withholding on Tips  If employee reports less than 8% of gross food/beverage sales in tips, then employer must allocate tips ◦ However, employer is not required to withhold taxes based on allocated tips  Employer must report employees’ tips to IRS and may allocate using one of four methods ◦ Gross receipts per employee ◦ Hours worked by each employee ◦ Good faith agreement on Employer’s Annual Information Return of Tip Income & Allocated Tips (Form 8027) ◦ Attributed Tip Income Program – any reasonable method for allocating tips is allowed 2012 Cengage Learning

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Backup Withholding  In some situations, individuals may be subject to flat 28% back-up withholding on interest and dividends*  This backup withholding, applied to dividends and interest, is required when: ◦ Taxpayer does not provide an identification number (SSN) or provides incorrect number ◦ Taxpayer fails to certify that he/she is not subject to withholding ◦ IRS informs payor that taxpayer gave incorrect identification number ◦ IRS informs payor that withholding is mandatory because taxpayer hasn’t complied in the past *This is to assure that tax is paid on this income 2012 Cengage Learning

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Estimated Payments  Taxpayers must make quarterly estimated tax payments if ◦ After withholding, payment due for the year is ≥ $1000 ◦ Quarterly payments due April 15, June 15, September 15, and January 15 of next year  Total annual estimated payments is lesser of ◦ 90% of current year tax or ◦ 100% of prior year tax or ◦ 90% of current year taxable income (TI), alternative minimum TI & adjusted self employment income annualize for each quarter  Nondeductible penalty applied for underpayment Exception: if AGI > $150,000 for prior year, then annual required estimated payments = 110% of prior year’s tax 2012 Cengage Learning

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FICA Tax  Federal Insurance Contributions Act (FICA) of 1935 was legislation intended to provide retirement and disability benefits for American workers and their families  FICA comprised of two taxes ◦ Social Security (OASDI) – employee pays 4.2% of first $106,800 of gross wages and employer pays 6.2%* and ◦ Medicare - 1.45% of total gross earnings, with no cap *Note: subsequent to 2011, the employee share of FICA will return to 6.2% 2012 Cengage Learning

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FICA Example Example Shannon is employed at Berkeley SolarTech LLC, where her 2011 annual salary = $115,000; what is her FICA tax for the current year? How much does her employer match? 2012 Cengage Learning

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Federal Tax Deposit System  Employer withholds both federal income tax and FICA from checks  Must deposit these taxes either monthly or semiweekly (IRS notifies tax payer) ◦ Monthly depositors make deposit by 15th of following month (all new employers are automatically monthly) ◦ Semiweekly depositors make deposit either Wednesday and/or Friday (depending upon when payroll is run )  Very small employers with federal payroll tax liabilities of $1,000 or less can file/pay annually by using a Form 944  Large employers (who accumulate $100,000 or more of tax liability must comply with special one-day deposit rule) 2012 Cengage Learning

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Federal Tax Deposit System  Deposits must be electronically deposited via Electronic Federal Tax Payment System (EFTPS) or by another electronic payment method  Form 941 (Employer’s Quarterly Federal Tax Return) must be accompanied by payroll taxes not yet deposited for quarter 2012 Cengage Learning Note that if liability is less than $2,500, employer may skip monthly deposits and pay with Form 941

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Employer Reporting Requirements  Annually, employers must send Wage and Tax Statement (Form W-2) to each employee by 1/31 ◦ Also, send to Social Security Administration by 2/28 with a Form W-3 transmittal  W-2 shows gross wages, income tax and FICA withholding and other items with tax ramifications ◦ Note that not all amounts on W-2 are subject to income tax withholding ◦ Special rules pertain to employer reimbursements for travel, if there is not an accountable plan in place  Form W-2G ◦ Required for gambling winnings, transmittal is W-3G 2012 Cengage Learning

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Information Returns  Annually, employers must complete and send out various Form 1099s for recipients of certain payments ◦ Must be mailed to recipients by 1/31 ◦ Exception: Stockbrokers have until 2/15 to mail 1099-B statements to recipients  Each kind of 1099 is transmitted by separate Form 1096  See Table 9.1 on page 9-78 for the various types of 1099s 2012 Cengage Learning

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Self-Employment Tax  Self-employment tax is the same as FICA, except self-employed taxpayer pays both shares  Therefore, rates are: ◦ Social Security (OASDI) is 10.4% of first $106,800 of net self-employment income (for 2011) ◦ Medicare is 2.9% on total net self-employment income  FICA is not required if net earnings < $400  May take a Deduction for AGI on individual tax return for ½ of self-employment tax paid (but this is calculated using 12.4% for OASDI, rather than the temporary 10.4%) If taxpayer has both W-2 wages and self-employment income, the $106,800 limit applies to the combined earnings 2012 Cengage Learning

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FUTA Tax  Federal Unemployment Tax Act (FUTA) requires employers to pay tax to administer state unemployment programs  Net FUTA rate =.8%* ◦ Must deposit quarterly, but only if over $500 ◦ Must file annual Form 940  Employers pay largest portion of unemployment taxes (SUTA) to state governments; in order to get full credit against FUTA they must pay by SUTA by due date *Please note: The FUTA rate has been reduced to.6% for wages beginning 7/1/11 – as we go to press, it is assumed that the.2% ‘surtax’ will be reinstated 2012 Cengage Learning

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The Nanny Tax  Provisions in place to simplify reporting process for employers of domestic household workers ◦ Household worker is anyone working in taxpayer’s home, such as cook, housekeeper, etc., where hiring party has “will and control” of the taxpayer. ◦ Applies to full- and part-time employees  Household employer must withhold and match FICA on any household worker who earns ≥ $1,700 in a calendar year ◦ Must withhold and deposit income taxes for household employees if asked to do so by employee and ◦ Must pay FUTA if employee annually earns more than $1,000 2012 Cengage Learning

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The Nanny Tax  To report, household employer must ◦ Complete Schedule H annually and attach to 1040 or ◦ If have non-household workers, may report household employees on Forms 941 and 940 with regular employees  Must file W-2 for each household employee who earns $1,700 or more a year  Similar to other types of employees, FICA withholding is reduced to 4.2% in 2011 for household employees 2012 Cengage Learning